Bills To End Corporate Foreign Income Deferral In US Congress

by Mike Godfrey, Tax-News.com, Washington

12 February 2013

Companion bills have been introduced simultaneously in the Senate and House
of Representatives that would repeal the rule allowing American corporations
to defer paying United States corporate income taxes on their offshore profits
until those profits are repatriated.

Bernie Sanders (I – Vermont), an independent member of the Senate Budget
Committee, and Jan Schakowsky (D – Illinois), a member of President Barack
Obama’s 18-member Fiscal Commission, introduced the bills “to stop
profitable corporations from sheltering income in the Cayman Islands and other
tax havens,” while the legislation would also “end tax breaks for
companies that ship jobs and factories overseas.”

According to the Joint Committee on Taxation, the proposed legislation would
provide more than US590bn in additional tax revenue over the next ten years.
“At a time when we have a USD16.5 trillion national debt and an unsustainable
federal deficit; at a time when roughly one-quarter of the largest corporations
in America are paying no federal income taxes; and at a time when corporate
profits are at an all-time high, it is past time for corporate America to contribute
significantly to deficit reduction,” said Sanders.

“Even as profits grow to record levels, corporations’ share of
tax revenues paid has dropped significantly in recent decades. Senator Sanders
and I are offering a comprehensive and commonsense solution that would eliminate
tax subsidies for big oil companies and corporations that are shipping jobs
and profits overseas,” Schakowsky added.

According to a 2008 Government Accountability Office Report, 83 of the Fortune
100 companies in the US have used offshore tax havens to lower their taxes.
Currently, US corporations have an estimated USD1.7 trillion of un-repatriated
foreign profits deposited outside the US.

The Corporate Tax Fairness Act would reform the tax code by ending the deferral
of foreign source income that allows US corporations to avoid paying taxes on
overseas profits, until the money is brought back into the US. Corporations
are also currently provided with foreign tax credits to offset the amount of
taxes paid to other countries.

The bills’ sponsors pointed out that those offshore tax arrangements
have provided two perverse incentives for American corporations. “First,
it motivates large companies to shift as much of their profits as possible overseas
by setting up subsidiaries in the Cayman Islands and other tax haven countries.
Second, it allows corporations to receive huge tax breaks for establishing manufacturing
facilities in countries with very low or no corporate tax rates. Closing these
tax loopholes would reduce the deficit and create jobs that millions of Americans
need.”

Under the proposed legislation, corporations would pay US taxes on their offshore
profits as they are earned – “the US would tax their profits no
matter where they are generated.”

US corporations would still continue to get a credit against their US taxes
for foreign taxes they pay. When an American corporation has profits in a country
with lower corporate taxes than the US, they would pay the US government the
difference between the foreign rate and the US rate. When an American corporation
has profits in a country with higher corporate taxes than the US, they would
pay nothing to the US.

However, the bills would also close the current provision that allows US corporations
to claim foreign tax credits for taxes paid on foreign income that is not subject
to current US tax. Companies are now able to use such credits to pay less tax
on their US taxable income than they would if it was all from US sources. The
Corporate Tax Fairness Act would limit foreign tax credits to offset income
only from the country in which it is earned.

In addition, the Act would prevent corporations from avoiding US taxes by claiming
to be foreign companies through the establishment of a post office box in another
country, even though their management and control operations are primarily located
in the US; and would eliminate the possibility for big oil companies to characterize
royalty payments to foreign governments as foreign taxes, allowing them to lower
their taxes in the US.

Global Incorporation Guide (GIG)

An intuitive international business, tax and investment smart tool that searches and compares global jurisdictions for the most effective corporate vehicles and structures based on intended use and ownership preferences.

IMPORTANT NOTICE: Wolters Kluwer TAA
Limited has taken reasonable care in sourcing and presenting the information
contained on this site, but accepts no responsibility for any financial
or other loss or damage that may result from its use. In particular, users
of the site are advised to take appropriate professional advice before
committing themselves to involvement in offshore jurisdictions, offshore
trusts or offshore investments.